The best investments for year 2010

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Sunday, October 4, 2009

Right now we are globally in period of low interest rates and low inflation rate. In some economies even with deflation. What should we do when inflation will start to rise again? How to invest money when inflation is inching up?

The best investments against inflation are investing in gold, index linked bonds, national savings index linked certificates, shares and property.

I will focus more on less risky inflation protected securities like TIPS (Treasury inflation protected securities) or "linkers" (inflation indexed bonds/gilts). Coupon payments reflect rising inflation and/or interest rates. TIPS are generally one of the safest investments. It should be a part of retirement or standard portfolio for better diversification.

These funds protect against US inflation. International exposure provides fund SPDR DB Intl Govt Infl-Protected Bond (WIP) which access inflation protected securities in 18 countries. Around 70 % of its portfolio come from foreign developed countries and 30 % from emerging markets. Regionally holdings include securities from France, UK, Canada, Japan, Brazil, Turkey or South Africa. Contrary to US TIPS this fund offers another diversification against weakening US dollar as international bonds are in 15 different currencies.

TIPS are safe for the owner, as an owner, but they are bad for the owner as a taxpayer (if he IS a taxpayer). That's because the inflation-protection element is nothing but a credit default swap, protecting against the way governments default, i.e., monetization of their debt. As a taxpayer, if I buy a TIPS, I probably won't take any action to make the inflation protection pay off. But if I'm a foreign government, maybe my interests aren't so clear. Maybe I'm a big exporter of, you know, toys and clothes and such, and I buy TIPS in anticipation of revaluing my currency upward. Maybe I sell bonds I own to pay for the TIPS, so that all I'm really buying is the credit default swap. Just a thought...